SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 30, 1999
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 1-10324
THE INTERGROUP CORPORATION
--------------------------
(Name of Small Business Issuer in its Charter)
Delaware 13-3293645
- ------------------------------- ------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
820 Moraga Drive, Los Angeles, California 90049-1632
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (310) 889-2500
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange On Which Registered
- ------------------- -----------------------------------------
Common Stock-$.01 Par Value Pacific Exchange, Inc.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - Par Value $.01 Per Share
---------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $16,802,000.
<PAGE> 2
The aggregate market value of the common equity held by non-affiliates of
issuer, computed by reference to the price the common equity was sold on
September 20, 1999 was $10,535,000.
The number of shares outstanding of the issuer's Common Stock, $.01 par
value, as of September 20, 1999 was 1,976,987.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one): Yes No [X]
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 3
Item 2. Description of Properties 5
55
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market For Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7. Financial Statements 15
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 32
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act 33
Item 10. Executive Compensation 36
Item 11. Security Ownership of Certain Beneficial Owners
and Management 41
Item 12. Certain Relationships and Related Transactions 42
Item 13. Exhibits and Reports on Form 8-K 43
SIGNATURES 45
<PAGE> 3
PART I
Item 1. Description of Business.
BUSINESS DEVELOPMENT
The InterGroup Corporation ("InterGroup" or the "Company") is a Delaware
corporation formed in 1985, as the successor to Mutual Real Estate Investment
Trust ("M-REIT"), a New York real estate investment trust created in 1965.
The Company has been a publicly-held company since M-REIT's first public
offering of shares in 1966 and has been a reporting company pursuant to
Section 12(g) of the Securities Exchange Act of 1934 since that time.
The Company was organized to buy, develop, operate, rehabilitate and dispose
of real property of various types and descriptions, and to engage in such
other business and investment activities as would benefit the Company and its
shareholders. The Company was founded upon, and remains committed to, social
responsibility. Such social responsibility was originally defined as
providing decent and affordable housing to people without regard to race. In
1985, after examining the impact of federal, state and local equal housing
laws, the Company determined to broaden its definition of social
responsibility. The Company changed its form from a REIT to a corporation so
that it could pursue a variety of investments beyond real estate and broaden
its social impact to engage in any opportunity which would offer the potential
to increase shareholder value within the Company's underlying commitment to
social responsibility, which it redefined to encompass investments in any area
which can have a socially redeeming value and promote the establishment of a
fair, equal and better society.
During the past three years the Company's principal sources of revenue have
been, and continue to be, derived from the operations of its multi-family
residential properties, from the sales and disposition of its real property
assets and from the investment of its cash and securities assets.
The Company owns 53.6% of the common stock of Santa Fe Financial Corporation
("Santa Fe"), a public company (Nasdaq SmallCap: SFEF) and had the power to
vote 57.4% of the voting shares of Santa Fe. Santa Fe's revenue is primarily
generated through its 67.2% interest in Portsmouth Square, Inc. ("PSI"), which
derives its revenue primarily through its 49.8% interest in Justice Investors
("Justice"), a limited partnership. Justice owns the land, land improvements
and leasehold known as the Holiday Inn Financial District/Chinatown, a 566-
room hotel in San Francisco, California.
BUSINESS OF ISSUER
The Company's principal business is the ownership and management of
multifamily residential properties. Those properties include nine apartment
complexes located throughout the United States. The Company also has
investments in unimproved real property that is held for sale or development.
The Company acquires its investments in real estate and other investments
utilizing cash, securities or debt, subject to approval or guidelines of the
Board of Directors. See Item 2 for a description of the Company's current
investments in and investment policies concerning real property.
<PAGE> 4
A portion of the Company's assets are invested under the direction of Mr. John
V. Winfield ("Mr. Winfield"), the Company's Chairman and President, in
securities and partnerships. The Company considers investing in equity and
debt securities of companies which are either publicly or privately held if
such an investment will offer growth or profit potential and not conflict with
management's perception of social responsibility. The Company's general
investment strategy regarding marketable securities is to identify both
national and international companies which management considers to be
currently out of favor or undervalued because of being misunderstood by the
general investing community and/or companies that potentially could go through
restructuring or reorganization. The Company will also invest in start up
entities, especially those involved in technologies where potential for growth
is perceived. Although the majority of the Company's marketable securities
investments are listed on either the New York or American Stock Exchanges, the
overall investment portfolio and the Company's investment strategies could be
viewed as highly risky and the market values of the portfolio may be subject
to large fluctuations.
The Company may realize gains and losses in its overall investment portfolio
from time to time to take advantage of market conditions and/or manage the
portfolio's resources and the Company's tax liability. The Company may also
assume short positions in marketable securities. Short sales are used by the
Company to potentially offset normal market risks undertaken in the course of
its investing activities or to provide additional return opportunities. In
addition, the Company utilizes margin for its marketable securities purchases
through the use of standard margin agreements with national brokerage firms.
The use of available leverage is guided by the business judgment of
management.
The Company also has a controlling interest in Santa Fe, which derives its
revenue primarily through an indirect interest in a 566-room Holiday Inn in
San Francisco, California. In addition, Santa Fe's operations include a
marketable securities portfolio and an interest in an apartment complex.
For further information see Item 6 Management's Discussion and Analysis of
Financial Condition and Results of Operations and Notes to Consolidated
Financial Statements.
COMPETITION
All of the properties owned by the Company are in areas where there is
substantial competition. However, management believes that the apartments and
hotel are generally in a competitive position in their respective communities.
The Company intends to continue upgrading and improving the physical condition
of its existing properties and to consider selling existing properties and re-
investing in new properties to remain competitive.
EMPLOYEES
As of June 30, 1999, the Company had a total of 11 full-time employees.
The employees and the Company are not party to any collective bargaining
agreement, and the Company believes that its employee relations are
satisfactory.
<PAGE> 5
Item 2. Description of Properties.
PROPERTIES
At June 30, 1999, the Company's investment in real estate consisted of
properties located throughout the United States. These properties include
nine apartment complexes wholly owned by the Company, an apartment complex
owned by the Company and its majority owned subsidiary Santa Fe, and a
commercial real estate property that serves as the Company's corporate
headquarters. All apartment complexes are completed, operating properties.
The Company also owns approximately 22.4 acres and 5.4 acres primarily
comprised of unimproved real estate in St. Louis, Missouri and Houston, Texas,
respectively. In the opinion of management, each of the properties is
adequately covered by insurance. None of the properties are subject to
foreclosure proceedings or litigation other than that incurred in the normal
course of business. The Company's rental property leases are short-term
leases, with no lease extending beyond one year.
Morris County, New Jersey. The Morris County property is a two-story garden
apartment complex that was completed in June 1964 with 151 units on
approximately 8 acres of land. The Company acquired the complex on September
15, 1967 at an initial cost of approximately $1,600,000. Real estate property
taxes for the year ended June 30, 1999 were approximately $135,000.
Depreciation is recorded on the straight-line method, based upon an estimated
useful life of 40 years. The outstanding mortgage balance was approximately
$5,135,000 at June 30, 1999 and the maturity date of the mortgage is January
1, 2006.
St. Louis, Missouri. The Company's St. Louis properties consist of three
properties, two of which are apartment complexes and one is primarily
unimproved land. The first apartment complex is a two-story project with 264
units on approximately 17.5 acres. The Company acquired the complex on
November 1, 1968 at an initial cost of $2,328,000. For the year ended June
30, 1999, real estate property taxes were approximately $98,000. Depreciation
is recorded on the straight-line method, based upon an estimated useful life
of 35 years. The outstanding mortgage balance was approximately $5,941,000 at
June 30, 1999 and the maturity date of the mortgage is July 1, 2008. The
second apartment complex is a two-story project with 176 units on
approximately 14 acres. The Company reacquired the complex through
foreclosure on May 11, 1989, and recorded the asset at $3,480,000 representing
the Company's total cost of the mortgage note receivable. For the year ended
June 30, 1999, real estate property taxes were approximately $36,000.
Depreciation is recorded on the straight-line method, based upon an estimated
useful life of 30 years. The outstanding mortgage balance was approximately
$4,729,000 at June 30, 1999 and the maturity date of the mortgage is April 1,
2003. The Company also owned approximately 22.4 acres of land adjacent to the
first apartment complex, which was acquired by the Company in March 1974 with
additional acquisitions in June and July 1995 for the aggregate price of
approximately $841,000. In 1999, the Company obtained a $2,000,000 letter of
credit secured by the land. The outstanding balance of the line of credit was
$2,000,000 at June 30, 1999 and the maturity date of the line of credit is
September 21, 1999. The property taxes for the year ended June 30, 1999 were
approximately $61,000. The additional parcels were acquired to provide better
access to the larger parcel. The site has been rezoned to enhance the value
and salability. In December of 1998, the Company entered into an agreement
to sale the entire parcel of land for $5,450,000. The sale was completed in
September 1999 and the $2,000,000 letter of credit was repaid. See "Note 14
Subsequent Events - Notes to Consolidated Financial Statements".
<PAGE> 6
Middletown, Ohio. The Middletown property is a two-story apartment complex
with 150 units on approximately 5.5 acres. The Company acquired the complex
on May 31, 1972 at an initial cost of approximately $1,670,000. For the year
ended June 30, 1999, real estate property taxes were approximately $50,000.
Depreciation is recorded on the straight-line method, based upon an estimated
useful life of 35 years. The outstanding mortgage balance was approximately
$2,444,000 at June 30, 1999 and the maturity date of the mortgage is December
1, 2008. On April 14, 1999, the Company entered into a contract to sell this
property for a gross sales price of $3,425,000. The sale was completed on July
30, 1999. See "Note 14 Subsequent Events - Notes to Consolidated Financial
Statements".
Cincinnati, Ohio. The Cincinnati property is a three-story apartment complex
with 100 units on approximately 5.8 acres. The Company acquired the complex
on October 20, 1972 at an initial cost of approximately $1,416,000. For the
year ended June 30, 1999, real estate property taxes were approximately
$61,000. Depreciation is recorded on the straight-line method, based upon an
estimated useful life of 40 years. The outstanding mortgage balance was
approximately $1,217,000 at June 30, 1999 and the maturity date of the
mortgage is July 1, 2004. On April 14, 1999, the Company entered into a
contract to sell this property for a gross sales price of $3,125,000. The sale
was completed on July 30, 1999. See "Note 14 Subsequent Events - Notes to
Consolidated Financial Statements".
Florence, Kentucky. The Florence property is a three-story apartment complex
with 157 units on approximately 6.0 acres. The Company acquired the property
on December 20, 1972 at an initial cost of approximately $1,995,000. For the
year ended June 30, 1999, real estate property taxes were approximately
$17,000. Depreciation is recorded on the straight-line method, based upon an
estimated useful life of 40 years. The outstanding mortgage balance was
approximately $2,963,000 at June 30, 1999 and the maturity date of the
mortgage is May 1, 2006.
Irving, Texas. The Irving property is a two-story apartment with 224 units on
approximately 9.9 acres. The Company acquired the property on September 16,
1994 at an initial cost of approximately $4,150,000. For the year ended June
30, 1999, real estate property taxes were approximately $87,000. Depreciation
is recorded on the straight-line method, based upon an estimated useful life
of 30 years. The outstanding mortgage balance was approximately $4,558,000 at
June 30, 1999 and the maturity date of the mortgage is January 1, 2008.
San Antonio, Texas. The San Antonio properties include two apartment
complexes. The first apartment complex is a two-story project with 228 units
on approximately 23.8 acres with an additional 9.7 acres of unimproved land
behind the complex. The Company acquired the complex on December 3, 1992 at
an initial cost of $2,300,000. For the year ended June 30, 1999, real estate
taxes were approximately $133,000. Depreciation is recorded on the straight-
line method, based upon an estimated useful life of 30 years. The outstanding
mortgage balance was approximately $1,861,000 at June 30, 1999 and the
maturity date of the mortgage is May 1, 2000. The second apartment complex is
a two-story project with 132 units on approximately 4.3 acres. The Company
acquired the complex on June 29, 1993 for $2,752,000. For the year ended June
30, 1999, real estate taxes were approximately $92,000. Depreciation is
recorded on the straight-line method, based upon an estimated useful life of
30 years. The outstanding mortgage balance was approximately $3,256,000 at
June 30, 1999 and the maturity date of the mortgage is December 1, 2008.
<PAGE> 7
Houston, Texas. The Houston property is a two-story apartment complex with
442 units on approximately 23.4 acres. In December 1996, the Company became
the General Partner of the Kansas limited partnership, which owns the
apartment complex in Houston, Texas, by obtaining the 30% interest in the
Partnership held by the former General Partner. Prior to December 1996, the
Company was a Limited Partner, and owned a 15% interest in the Partnership.
During the quarter ended March 31, 1998, the Company acquired all of the
remaining Limited Partners' interests. The total cost of the property was
$4,970,000 and the outstanding mortgage at the acquisition date was
$3,596,000. The property taxes for the year ended June 30, 1999 were
approximately $129,000. Depreciation is recorded on the straight-line method,
based upon an estimated useful life of 30 years. The outstanding mortgage
balances were approximately $3,450,000 and $16,000 at June 30, 1999 and the
maturity dates of the mortgages are June 1, 2000 and February 2, 2001,
respectively.
Los Angeles, California. On March 4, 1999, the Company acquired a 5,500
square foot, two story, commercial real estate property located in Los Angeles
for $1,876,000. The property was acquired in connection with the sale of the
Harrisburg, Pennsylvania property in a partial 1031 Tax Free Exchange. This
property currently serves as the Company's new corporate headquarters. (See
Footnote 2 - Investment in Real Estate).
REAL ESTATE INVESTMENT POLICIES
The most significant investment activity of the Company has been to acquire,
operate and, when appropriate, sell income-producing residential real estate.
The Company's focus is on owning and operating integrated multi-family
apartment buildings. Through its marketable securities portfolio the Company
has indirectly invested in additional real estate related investments such as
hotels, office buildings and shopping centers where financial benefit could
inure to its shareholders.
The Company is presently looking for new real estate investment opportunities
and plans to continue to concentrate its real estate investments in developed
properties. The acquisition of new real estate investments will depend on the
Company's ability to find suitable investment opportunities and the
availability of sufficient financing to acquire such investments. The Company
plans to borrow funds to leverage its investment capital. The amount of the
mortgage debt will depend on a number of factors including, but not limited
to, the availability of financing and the ability of projected property cash
flows to support its operations and debt service.
Additionally, the Company may make investments and loans in connection with
real property owned by partnerships, corporations or individuals.
MORTGAGES
Information with respect to mortgage notes payable of the Company is set forth
in Note 6 of the Notes to Consolidated Financial Statements.
<PAGE> 8
POTENTIAL RENTAL RATES AND PHYSICAL OCCUPANCY RATES
The Company leases units in its residential rental properties on a short-term
basis, with no lease extending beyond one year. The effective annual rental
rate per unit (gross annual rental revenues based on 100% occupancy divided by
the total number of apartment units) and the occupancy rate (total gross
potential rent less vacancy loss divided by total gross potential rent) for
each of the Company's properties for fiscal year ended June 30, 1999 are
provided below.
Effective Annual Physical
Property Rental Rate Per Unit Occupancy Rate
-------- -------------------- --------------
Morris County, NJ $9,988 99%
Middletown, OH $5,316 91%
Cincinnati, OH $7,494 90%
Florence, KY $6,075 93%
St. Louis County, MO I $5,078 91%
St. Louis County, MO II $7,487 98%
Irving, TX $6,745 95%
San Antonio, TX I $6,268 92%
San Antonio, TX II $5,860 96%
Houston, TX $5,620 82%
MANAGEMENT OF THE PROPERTIES
The Company utilized a third party management company with national operations
to manage all of the Company's properties. On March 31, 1999, the Company
terminated its agreement with the management company and began to manage all
the properties in-house.
Item 3. Legal Proceedings
Guinness Peat Group plc, et al. v. Robert N. Gould, et al., Case No. 685760,
was filed on February 22, 1995, in the Superior Court of the State of
California for the County of San Diego. The lawsuit is a shareholders
derivative suit brought by Guinness Peat Group plc and its wholly-owned
subsidiary Allied Mutual Insurance Services Limited (collectively "GPG")
against InterGroup, certain directors of Santa Fe and Santa Fe as a nominal
defendant. The complaint alleged certain breaches of fiduciary duties by the
directors in causing Santa Fe to enter into a December 20, 1994 Securities
Purchase Agreement (the "Agreement") with InterGroup and fraud on the part of
InterGroup in inducing the director defendants to enter into the Agreement.
On April 14, 1995, the Superior Court granted motions by the director
defendants and InterGroup requiring GPG to posts bonds to secure payment of
their attorneys' fees should they prevail in the litigation. The required
bonds, totaling $800,000, were posted by GPG.
On December 31, 1996, the trial court entered a summary judgment in favor of
InterGroup, ruling that there was no fraud in connection with the Agreement.
That summary judgment, including a subsequent award of attorneys' fees and
costs in favor of InterGroup in the amount of $296,000, plus interest at the
statutory rate of 10%, was appealed by GPG. On August 27, 1999, the Court of
Appeal, Fourth Appellate District Division One of the Sate of California filed
its opinion affirming the summary judgment and award of attorneys' fees and
costs in favor of InterGroup. On September 13, 1999, GPG filed a Petition for
Rehearing of that appeal.
<PAGE> 9
Previously, on July 3, 1997, the Court of Appeal granted the director
defendants' petition for a writ of mandate and directed the trial court to
enter an order granting summary judgment in favor of the director defendants.
The Court of Appeal's decision became final on August 2, 1997 and GPG's
petition for review was denied by the California Supreme Court on October 15,
1997.
As prevailing parties, the director defendants and Santa Fe also made
application to the Superior Court for recovery of the attorneys' fees and
costs expended in their successful defense of this litigation. On March 13,
1998, the trial court granted the applications for attorneys' fees and costs
in the total amount of $936,000, plus interest at the statutory rate of 10%.
On March 24, 1998, a judgment was entered in favor of the director defendants
and Santa Fe, which made the award of attorneys' fees and costs effective as
of February 20, 1998. That judgment was appealed by GPG and is waiting for
oral argument to be scheduled.
On March 27, 1998, a wrongful termination action was filed in the Los Angeles
County Superior Court entitled, Howard A. Jaffe v. The InterGroup Corporation,
et al., Case No. BC188323. The Complaint was filed by an ex-employee, officer
and director against the Company and its President and Chairman. The
Complaint, as originally filed, sought an award of back and future pay,
employee benefits, restitution, unspecified punitive and special damages and
attorneys' fees. In June of 1998, a demurrer to the Complaint was sustained
without leave to amend, with respect to plaintiff's tort claim for breach of
implied covenant of good faith. On or about August 3, 1998, a demurrer to a
First Amended Complaint was sustained without leave to amend with respect to
plaintiff's claim of violation of section 17200 et seq. of the California
Business and Professions Code. Plaintiff filed a petition for a writ of
mandate challenging that decision, which was summarily denied by the Court of
Appeal. A subsequent petition to the California Supreme Court was also
denied.
Plaintiff also filed an appeal from an order denying his motion to
disqualify the law firm representing the Company and its Chairman and
President. The filing of that appeal has resulted in a stay of all trial
court proceedings in that action. The case is in its very early stages and
discovery has just commenced, so it is not possible to predict the outcome at
this time.
As an officer and director, the Company's President and Chairman has requested
indemnification from the Company as permitted by law and under the Bylaws and
Articles of the Company. The case will be vigorously defended and there may
be insurance coverage for all or part of the costs of the defense of this
action and for all or part of any liability that may be imposed on the
Company.
7709 Lankershim Ltd. v. Carreon Villa Apartments I, et al., Riverside County
Superior Court Case No. 088325 was filed on March 27, 1996 against the Company
and others. The action arises out of alleged construction defects in two
Indio, California apartment complexes formerly owned by the Company. The
Complaint alleges damages in the amount of $2,000,000. The Company has filed
cross-complaints against the subcontractors and the architect. A motion for
summary judgment was also filed by the Company, which was joined by the other
defendants. Although that motion was denied on April 22, 1999, the resulting
ruling considerably narrowed the issues to be litigated. The case is still in
its early stages and only limited discovery has taken place. Accordingly, it
is not possible to assess what exposure, if any, the Company may have at this
time. There may be insurance coverage for all or part of the costs of defense
and for all or part of any liability that may be imposed on the Company.
<PAGE> 10
On October 15, 1997, a related action for Declaratory Relief was filed by the
insurance carrier entitled, Truck Insurance Exchange v. Carreon Villa
Apartments I, et al., Riverside County Superior Court Case No. 004158. In its
Complaint, the carrier alleges that the Company has no coverage with respect
to at least one of the Carreon entities. The Company filed an answer and
cross-complaint for breach of contract, breach of the covenant of good faith
and fair dealing and for declaratory relief. The insurance company filed a
motion to strike the punitive damages claims in the cross-complaint, which was
granted. To date, limited discovery has occurred. The Company intends to
vigorously defend against the complaint and prosecute its cross-complaint in
this action. The parties have stipulated to continue the trial date in this
matter to January 2000, in order to discuss settlement. It is not possible to
predict the outcome of this action at this time.
Woodlake Management, Inc., et al. v. Intergroup Whisperwood, Inc. et al.,
Pennsylvania Court of Common Pleas, Philadelphia County, Case No. 001642.
On June 16, 1999, a complaint was filed against the Company's wholly-owned
subsidiary Intergroup Whisperwood, Inc. ("Whisperwood") and the Company's
former property manager, Pinnacle Realty Management Company ("Pinnacle")
alleging breach of contract, misrepresentation and fraud in connection with
the sale of the Whisperwood Apartments. The complaint prays for an award of
compensatory, consequential and special damages in excess of $50,000, punitive
damages and an award of costs and attorneys' fees. Whisperwood has filed
preliminary objections to the complaint seeking dismissal of the action.
Whisperwood intends to vigorously defend this action. Since the case is in
its very early stages, it is not possible to predict the outcome of this
action at this time.
Wayne Prosser, Matthew Prosser and Rodney John Young v. Intergroup Cross Keys,
Inc., The InterGroup Corporation and Pinnacle Realty Management Company, State
of Missouri Department of Labor and Industrial Relations, Division of Workers'
Compensation, Claims Nos. 99-036816, 98-171801 and 98-171806. In April 1999,
three Workers' Compensation claims were filed with the Missouri Department of
Labor and Industrial Relations for injuries suffered by claimants while
performing work at the Cross Keys Apartments owned by the Company's wholly-
owned subsidiary, Intergroup Cross Keys, Inc. ("Cross-Keys"). Also named as a
defendant in that action is the Company's former property manager, Pinnacle.
Claimants allege that they have suffered permanent and total disability as a
result of receiving electrical shock from coming in contact with power lines
on the property.
Claimants have alleged that they were employees, or statutory employees, of
InterGroup, Cross Keys and/or Pinnacle. InterGroup, Cross-Keys and Pinnacle
have all asserted that Claimants were independent contractors and were not
employees. InterGroup has tendered the matter to its Workers' Compensation
insurance carrier for defense and indemnification. This action is in its very
early stages and no discovery has been taken. While InterGroup and Cross Keys
believe that this is not a proper Workers' Compensation action, it is
impossible to predict at this point how the Missouri Department of Labor and
Industrial Relations will rule on the statutory employee issue. InterGroup
and Cross Keys will vigorously defend against these claims and take all
actions necessary to assure that these claims are covered by insurance.
Claimants have also filed a separate civil action against Union Electric in
the Circuit Court of St. Louis, Missouri as Case No. 98-209048. To date,
InterGroup, Cross Keys and Pinnacle have not been named in that action. If
named as defendants, InterGroup and Cross Keys believe that they have
sufficient liability insurance to cover such claims.
The Company is a defendant or co-defendant in various other legal actions
involving various claims incident to the conduct of its business. Most of
these claims are covered by insurance. Management does not anticipate the
Company to suffer any material liability by reason of such actions.
<PAGE> 11
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
MARKET
The Company's Common Stock is traded on The National Market System of the
Nasdaq Stock Market, Inc. ("Nasdaq-NMS") and is also listed on the Pacific
Exchange, Inc. The following table sets forth the high and low sales prices
(adjusted for stock splits) for the Company's common shares for each quarter
of the last two fiscal years as reported by the National Quotation Bureau
Incorporated or Nasdaq, Inc.
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter 7/1 - 9/30 $18.70 $11.25
Second Quarter 10/1 - 12/31 $15.75 $10.00
Third Quarter 1/1 - 3/31 $15.75 $11.50
Fourth Quarter 4/1 - 6/30 $13.75 $11.86
Fiscal 1998
- -----------
First Quarter 7/1 - 9/30 $18.67 $15.00
Second Quarter 10/1 - 12/31 $19.33 $15.00
Third Quarter 1/1 - 3/31 $19.67 $15.00
Fourth Quarter 4/1 - 6/30 $26.67 $17.66
As of June 30, 1999, there were 996 shareholders of record.
STOCK SPLIT IN THE FORM OF A DIVIDEND
On June 5, 1998, the Company's Board of Directors approved a three-for-two
forward stock split of the Company's $.01 par value Common Stock in the form
of a stock dividend. The dividend was paid in shares of the Company's Common
Stock on June 30, 1998 to shareholders of record as of June 16, 1998.
On August 31, 1998, the Company's Board of Directors approved a three-for-two
forward stock split of the Company's $.01 par value Common Stock in the form
of a stock dividend. The dividend was paid in shares of the Company's Common
Stock on October 9, 1998 to shareholders of record as of September 23, 1998.
On August 31, 1998 the Board of Directors authorized an amendment to the
Company's Certificate of Incorporation which increased the number of shares of
$.01 par value per share, Common Stock, that the Company is authorized to
issue from 1,500,000 shares to 4,000,000 shares. The amendment also increased
the authorized number of shares of Preferred Stock from 100,000 shares to
2,500,000 shares and changed the par value of the Preferred Stock from $0.10
to $0.01. In addition, the amendment gave the Company the authorization to
issue 2,500,000 shares of $0.01 par value, Class A Common Stock.
These actions were taken to help the Company achieve and sustain long term
compliance with the applicable maintenance criteria for continued listing on
the NMS.
The Company has not declared any cash dividends on its common stock and does
not foresee issuing cash dividends in the near future.
<PAGE> 12
Item 6. Management Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
The discussion below and elsewhere in the Report includes forward-looking
statements about the future business results and activities of the Company,
which, by their very nature, involve a number of risks and uncertainties. When
used in this discussion, the words "estimate", "project", "anticipate" and
similar expressions, are subject to certain risks and uncertainties, such as
changes in general economic conditions, local real estate markets, and
competition, as well as uncertainties relating to uninsured losses, securities
markets, and litigation, including those discussed below that could cause
actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements.
The Company undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
For the Year Ended June 30, 1999 as compared to June 30, 1998
Comprehensive income for the Company increased 21.2% to $1,196,000 for the
year ended June 30, 1999 compared to $986,000 for the year ended June 30,
1998. Comprehensive income is an all-inclusive income concept where all
revenues, expenses, gains and losses (whether realized or unrealized) arising
during the period are included in income. Management believes that the
comprehensive income concept provides a more complete understanding of the
economic and financial performance of the Company.
The Company realized gains on sale of real estate of $2,884,000 for the year
ended June 30, 1999 as compared to none for the year ended June 30, 1998. The
realized gains resulted from the sale of two properties. In April 1999, the
Company sold the two-story, 160-unit apartment complex located in San Antonio,
Texas for $4,000,000 for a realized gain of $619,000. In October 1998, the
Company sold another two-story, 150-unit apartment complex located in
Harrisburg, Pennsylvania for $3,762,500 for a realized gain of $2,265,000. A
portion of the proceeds from the sale of the Harrisburg, Pennsylvania property
was used to purchase a two-story commercial real estate property located in
Los Angeles, California in a 1031 tax-deferred exchange. The property serves
as the new corporate headquarters of the Company.
Rental income from real estate operations increased by 7.4% to $12,764,000 for
the year ended June 30, 1999 compared to $11,876,000 for the year ended June
30, 1998. The increase was due to the increase in occupancy from the Houston,
Texas acquired in February 1998 and the overall increase in occupancy rates
and average rental rates. The increase was partially offset by the sale of
the Harrisburg, Pennsylvania and San Antonio, Texas properties.
Property operating expenses decreased 7.3% to $6,027,000 for the year ended
June 30, 1999 compared to $6,507,000 for the year ended June 30, 1998
primarily due to the sale of the two properties and savings throughout the
real estate portfolio.
<PAGE> 13
Real estate taxes decreased 18.6% to $889,000 for the year ended June 30, 1999
compared to $1,093,000 for the year ended June 30, 1998 primarily due to the
sale of the Harrisburg, Pennsylvania and San Antonio, Texas properties.
Net investment gains and losses recognized in the income statement does not
include all unrealized gains and losses arising during the year. The Company
had net unrecognized investment gains of $4,888,000 for the year ended June
30, 1999 compared to net unrecognized investment gains of $1,387,000 for the
year ended June 30, 1998. If these net gains arising during the year ended
June 30, 1999 and 1998 were recognized in net investment gains and losses, as
reported in the income statement, income from investment transactions would
have been $780,000 and $6,259,000, respectively.
Recognized investment gains and losses may fluctuate significantly from period
to period, with a meaningful effect upon the Company's net earnings. However,
in the opinion of management, the amount of recognized investment gain or loss
for any given period has no predictive value, and variations in amounts from
period to period have no practical analytical value, particularly in view of
the net unrealized pretax gain of $13,467,000 in the Company's overall
investment portfolio as of June 30, 1999. The Company recognized net
investment losses of $6,450,000 for the year ended June 30, 1999 compared to
net investment gains of $2,352,000 for the year ended June 30, 1998.
In recent months, the Company has increased the turnover of its investment
portfolio and engaged in increased trading activities designed to maximize the
overall return on investment activities in the near term. This has resulted in
portions of the Company's investments in marketable securities being
classified as "trading" for generally accepted accounting principles. After
consultation with the Investment Committee of the Board of Directors,
management has determined that the classification of the entire portfolio as
trading for the quarter ending September 30, 1999 would be more consistent
with Company's overall investment objectives and activities. As a result,
beginning with its first quarter ending September 30, 1999, all unrealized
gains and losses on the Company's investment portfolio will be recorded
through the income statement.
The Company's equity in net income of Justice Investors increased 6.5% to
$3,093,000 for the year ended June 30, 1999 compared to $2,904,000 for the
year ended June 30, 1998. The increase in partnership income was primarily
attributable to an increase in garage rental income and a small increase in
hotel rental income which was impacted by the loss of meeting rooms and other
revenues while the common areas of the hotel were being renovated in January
and February 1999.
Margin interest, trading, and management expenses increased 15.5% to
$1,696,000 for the year ended June 30, 1999 compared to $1,468,000 for the
year ended June 30, 1998 due primarily to an increase in trading-related and
management expenses to $639,000 from $449,000, respectively.
General and administrative expenses decreased 14.2% to $1,636,000 for the year
ended June 30, 1999 compared to $1,907,000 for the year ended June 30, 1998.
The decrease reflects savings in general and administrative expenses due to
the consolidation of certain accounting and administrative functions of Santa
Fe and Portsmouth to the Los Angeles, California offices of the Company.
Income tax benefit(expense) of $1,005,000 and ($934,000) was provided by the
Company for the years ended June 30, 1999 and 1998, respectively. The income
tax benefit was primarily due to the net loss during the current period.
<PAGE> 14
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are generated primarily from its real estate
activities, sales of investment securities and borrowings related to both.
The Company used net cash flow of $143,000 from operating activities, used net
cash flow of $19,840,000 from investing activities and generated net cash flow
of $15,184,000 from financing activities during the year ended June 30, 1999.
During the year ended June 30, 1999, the Company improved properties in the
aggregate amount of $1,566,000. Management believes the improvements to the
properties should enhance market values, maintain the competitiveness of the
Company's properties and potentially enable the Company to obtain a higher
yield through higher rents.
Marketable securities increased $21,041,000 during the year ended June 30,
1999 compared to a decrease of $4,034,000 for the year ended June 30, 1998.
The increase in marketable securities was financed through the use of margin
which increased by $13,552,000, net proceeds from the sale of the two
properties of $2,589,000, net proceeds of $943,000 from the refinancing of one
mortgage, borrowings from letter of credit of $2,000,000, and proceeds of
$3,328,000 from shorting of securities and writing of options. The total
proceeds generated above was partially offset by cash paid for margin
interest, trading and management expenses of approximately $1,696,000.
Accumulated net unrealized holding gains, net of deferred tax, increased 57%
to $8,080,000 as of June 30, 1999 compared to $5,147,000 as of June 30, 1998.
During 1999, the Company received net proceeds aggregating $3,142,000 from the
sale of two properties located in Harrisburg, Pennsylvania and San Antonio,
respectively. Subsequent to June 30, 1999, the Company completed the sale of
two additional properties located in Cincinnati and Middleton, Ohio for net
cash proceeds of $2,551,000, all of which is being held in escrow pending a
1031 tax-deferred exchange for other properties. In addition, the Company
entered into a contract to sell its 22.4 acres of unimproved land located in
St. Louis, Missouri for $5,450,000. The sale was completed at the end of
September 1999. The Company also entered into contracts to purchase three
properties for purchase prices totaling $10,375,000. Two of the properties are
located in California and the third property is located in Texas. The purchase
of the properties will be funded through the proceeds from the sale of the two
properties and the improved land in 1031 tax-deferred exchanges with the
remaining cash provided through mortgage borrowings. The purchases are
expected to be completed on or prior to November 1999.
The Company's outstanding indebtedness represents mortgages on real estate,
which amounted to $36,875,000 as of June 30, 1999. During the year, the
Company made principal payments totaling $6,749,000, $4,090,000 of which
represent the payoff of the two mortgages related the two sold properties. The
Company also refinanced one of its mortgages, which produced $943,000 in net
cash proceeds to the Company. Management will pursue refinancing activities
as considered necessary or when deemed economically favorable to the Company.
On January 13, 1998 the Company's Board of Directors approved the repurchase,
from time to time, of up to 150,000 shares of its Common Stock. Such
repurchases, together with previously authorized repurchases of up to 72,000
shares which remain under a prior repurchase program, may be made in the
discretion of management and depending upon market conditions. The Company
acquired 100,776 and 21,375 shares during the years ended June 30, 1999 and
1998, respectively. Total cash used to acquire the shares aggregated
$1,265,000 and 339,000, respectively, for the years ended June 30, 1999 and
1998.
<PAGE> 15
Management anticipates that its net cash flow from real estate operations,
securities transactions and real estate financing activities will be
sufficient to fund any property acquisitions, property improvements, debt
service requirements and operating expenses during fiscal year 1999.
Management also anticipates that the net cash flow generated from future
operating activities will be sufficient to meet its long-term debt service
requirements.
YEAR 2000 ISSUES
The Company is aware of the potential implications that the year 2000
("Y2K") issue could have on its business and, as a result, is in the process
of determining what, if any, steps the Company must take to cure any potential
computer software or hardware problems associated with the year 2000. The
Company has hired professional outside consultants to assist it in addressing
its Y2K needs. The Company's plan includes upgrading existing software
applications to make them Y2K compliant, replacing some hardware required by
the software upgrades, purchasing new computer hardware and upgrading its
computer network and communication systems. The Company has also contacted
suppliers of various services and materials regarding their readiness and
plans for Y2K. The cost incurred by the Company to date for consultants,
software and hardware applications has been approximately $50,000. Management
does not believe the remaining costs to complete the Y2K compliance will have
a material effect on the Company's financial position.
Based on discussions with its outside consultants, service providers and
software and hardware vendors, the Company has determined that its systems,
both information technology and non-information technology, are not reasonably
likely to be impacted by Y2K and the Company anticipates that it will be Y2K
compliant by October 31, 1999.
IMPACT OF INFLATION
The Company's residential rental properties provide income from short-term
operating leases and no lease extends beyond one year. Rental increases are
expected to offset anticipated increased property operating expenses.
The Company's revenue from its interest in Justice is primarily dependent on
hotel revenues. Hotel room rates are typically impacted by supply and demand
factors, not inflation, because rental of a hotel room is usually for a
limited number of nights. Room rates are usually adjusted to account for
inflationary cost increases, therefore; the impact of inflation should be
minimal.
Item 7. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Independent Accountants 16
Consolidated Balance Sheet at June 30, 1999 17
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 1999 and June 30, 1998 18
Consolidated Statements of Shareholders' Equity for the years
ended June 30, 1999 and June 30, 1998 19
Consolidated Statements of Cash Flows for the years ended
June 30, 1999 and June 30, 1998 20
Notes to Consolidated Financial Statements 21
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Shareholders of
The Intergroup Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, of
shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of The Intergroup Corporation and their
subsidiaries ("the Company") at June 30, 1999 and June 30, 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1999 and June 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
September 10, 1999
<PAGE> 17
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEET
As of June 30, 1999
-----------
ASSETS
<S> <C>
Investment in real estate, at cost:
Land $ 7,436,000
Buildings, improvements and equipment 33,984,000
Property held for sale or development 2,190,000
-----------
43,610,000
Less: accumulated depreciation (16,076,000)
-----------
27,534,000
Cash and cash equivalents 514,000
Restricted cash 1,459,000
Marketable equity securities:
Available-for-sale 47,610,000
Trading 6,137,000
Investment in Justice 10,072,000
Other investments 3,011,000
Prepaid expenses and other assets 3,640,000
-----------
Total Assets $ 99,977,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 36,875,000
Obligation for securities sold 13,948,000
Due to securities brokers 17,756,000
Accounts payable and other liabilities 5,423,000
Deferred income taxes 3,495,000
----------
Total Liabilities 77,497,000
----------
Minority Interest 9,930,000
----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, $.01 par value, 2,500,000 shares
authorized; none issued -
Common stock - Class A, $.01 par value, 2,500,000
Shares authorized: none issued
Common stock, $.01 par value, 4,000,000 shares
authorized; 2,129,288 shares issued and 2,022,887
outstanding 21,000
Additional paid-in capital 8,686,000
Accumulated deficit (1,444,000)
Accumulated other comprehensive income, net of
Deferred taxes 8,080,000
Note receivable - stock options (1,438,000)
Treasury stock, at cost, 106,401 shares (1,355,000)
-----------
Total Shareholders' Equity 12,550,000
-----------
Total Liabilities and Shareholders' Equity $ 97,977,000
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 18
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<S> <C> <C>
For the Year Ended June 30, 1999 1998
Real estate operations: ----------- -----------
Rental income $ 12,764,000 $ 11,876,000
Rental expenses:
Mortgage interest expense 2,961,000 3,000,000
Property operating expenses 6,027,000 6,507,000
Real estate taxes 889,000 1,093,000
Depreciation 2,084,000 1,938,000
----------- -----------
803,000 (662,000)
Gain on sale of real estate 2,884,000 -
---------- -----------
Income(loss) from real estate operations 3,687,000 (662,000)
---------- -----------
Investment transactions:
Dividend and interest income 945,000 1,084,000
Net investment (losses)gains (6,450,000) 2,352,000
Margin interest, trading and management
expenses (1,696,000) (1,468,000)
Equity in net income of Justice Investors 3,093,000 2,904,000
----------- ----------
Income(loss) from investment transactions (4,108,000) 4,872,000
----------- ----------
Other expenses:
General and administrative expenses (1,636,000) (1,907,000)
Other expenses (438,000) (434,000)
----------- -----------
Other expenses (2,074,000) (2,341,000)
----------- -----------
Income(loss)before provision for income taxes (2,495,000) 1,869,000
Provision for income tax benefit(expense) 1,005,000 (934,000)
Minority interest 51,000 (453,000)
---------- -----------
Income (loss) before extraordinary item (1,439,000) 482,000
Extraordinary loss due to early extinguishment
of debt less applicable income tax benefit
of $199,000 and $219,000 (298,000) (328,000)
---------- -----------
Net (loss)income $ (1,737,000) $ 154,000
========== ===========
Earnings (loss) per share before
extraordinary item $ (0.69) $ 0.22
Loss per share related to
extraordinary item (0.14) (0.15)
---------- -----------
(Loss) earnings per share $ (0.83) $ 0.07
========== ===========
Weighted average number of shares outstanding 2,092,297 2,135,403
========== ===========
Comprehensive income (loss):
Net (loss) income $ (1,737,000) $ 154,000
Unrealized holding (loss) gain on
marketable securities (4,924,000) 4,458,000
Reclassification adjustment for holding
Loss (gain) included in net earnings 6,450,000 (2,352,000)
Income tax benefit(expense) related to
other comprehensive income 1,407,000 (1,274,000)
----------- ----------
Comprehensive income $ 1,196,000 $ 986,000
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 19
<TABLE>
<CAPTION>
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
other
Additional comprehensive Note
Common paid-in Accumulated income, Treasury receivable
stock capital deficit net of taxes stock options Total
------ --------- --------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30,1997 $15,000 $13,658,000 $1,947,000 $ 5,980,000 $(6,558,000) $(1,438,000) $13,604,000
Net Income 154,000 154,000
Purchase of
treasury stock (339,000) (339,000)
Retirement of
treasury stock (5,000) (5,005,000) (1,797,000) 6,807,000 -
Three-for-two
stock split 4,000 (7,000) (4,000) (7,000)
Issuance of
common
stock options 40,000 40,000
Unrealized holding
loss on marketable
securities,
net of tax (1,538,000) (1,538,000)
Increase in
unrealized
gain due to
acquisition 705,000 705,000
------ --------- --------- ----------- ---------- --------- ---------
Balance at
June 30, 1998 $14,000 $8,686,000 $ 300,000 $ 5,147,000 $ ( 90,000) $(1,438,000) $12,619,000
Net loss (1,737,000) (1,737,000)
Purchase of
treasury stock (1,265,000) (1,265,000)
Three-for-two
Stock split 7,000 (7,000)
Unrealized holding
gain on marketable
securities,
net of tax 2,933,000 2,933,000
------- --------- --------- ----------- ---------- --------- ----------
Balance at
June 30, 1999 $21,000 $8,686,000 $(1,444,000) $ 8,080,000 $(1,355,000) $(1,438,000) $12,550,000
======= ========= ========= ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 20
<TABLE>
<CAPTION>
THE INTERGROUP COPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended June 30, 1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)income ($1,737,000) $ 154,000
Adjustments to reconcile net (loss)income
to cash provide by(used in) operating
activities:
Depreciation of real estate 2,084,000 1,938,000
Other amortization 142,000 193,000
Gain on sale of real estate (2,884,000) -
Net loss (gain) on sale of investments 6,450,000 (2,351,000)
Equity in net income of Justice Investors (3,093,000) (2,904,000)
Minority Interest (51,000) 453,000
Changes in assets and liabilities:
Prepaid expenses and other assets (1,952,000) 93,000
Accounts payable and other liabilities 449,000 327,000
Income taxes payable 449,000 (306,000)
----------- ------------
Net cash used in operating activities (143,000) (2,403,000)
----------- ------------
Cash flows from investing activities:
Additions to buildings, improvements and
equipment (1,566,000) (3,757,000)
Investment in real estate (1,937,000) (265,000)
Proceeds from sale of real estate 7,232,000 -
Investment in Santa Fe (61,000) (1,230,000)
Purchase of investment securities (94,416,000) (42,206,000)
Proceeds from the sale of investment
securities 69,107,000 48,591,000
Decrease(increase) in other investments (692,000) 1,006,000
Distributions from Justice Investors 2,493,000 2,096,000
Cash of business acquired - 2,173,000
----------- -----------
Net cash (used in) provided by investing
activities (19,840,000 6,408,000
---------- ------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (6,749,000 (1,232,000)
Proceeds from real estate refinancing 3,274,000 5,920,000
Borrowings from mortgage notes payable 1,306,000 -
Borrowings from letter of credit 2,000,000 -
Decrease in restricted cash 272,000 212,000
Increase(decrease) in securities sold 3,328,000 (629,000)
Increase(decrease) in due to securities
brokers 13,552,000 (4,306,000)
Dividends paid to minority shareholders (534,000 (129,000)
Purchase of treasury stock (1,265,000 (339,000)
----------- -----------
Net cash provided by (used in) financing
activities 15,184,000 (503,000)
----------- -----------
Net (decrease)increase in cash and cash
equivalents (4,799,000) 3,502,000
Cash and cash equivalents at beginning of
period 5,313,000 1,811,000
----------- -----------
Cash and cash equivalents at end of period $ 514,000 $ 5,313,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 21
THE INTERGROUP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Significant Accounting Policies and Practices:
Description of the Business
The Intergroup Corporation ("Intergroup" or the "Company") was formed to buy,
develop, operate and dispose of real property and to engage in various
investment activities to benefit the Company and its shareholders.
As of June 30, 1999 and 1998, the Company owned 53.6% and 46.9% respectively,
of the outstanding stock of Santa Fe Financial Corporation ("Santa Fe"). On
June 30, 1998, the Company's Chairman and President entered into a voting
trust giving the Company the power to vote the shares of Santa Fe common stock
that he owned. As a result of this agreement, as of June 30, 1999 and 1998,
the Company had the power to vote 57.3% and 50.6% respectively, of the voting
shares of Santa Fe.
Santa Fe's revenue is primarily generated through its 67.2% interest in
Portsmouth Square, Inc. ("PSI"), which derives its revenue primarily through
its 49.8% interest in Justice Investors ("Justice"), a limited partnership.
Justice owns the land improvements and leasehold known as the Financial
District Holiday Inn, a 556-room hotel in San Francisco, California.
Principles of Consolidation and Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Material intercompany
transactions and balances have been eliminated in consolidation. Investments
in companies in which the Company maintains an ownership interest of 20% to
50% or exercises significant influence are accounted for under the equity
method. The cost method is used where the Company maintains ownership interest
of less than 20% and does not exercise significant influence over the
investee.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities of the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Investment in Real Estate
Investments in real estate are stated at cost. Depreciation of buildings,
improvements and equipment is provided on the straight-line method based upon
estimated useful lives of five to forty years for buildings and improvements
and five to ten years for equipment. Expenditures for repairs and maintenance
are charged to expense as incurred and improvements are capitalized.
The carrying value of real estate is assessed regularly by management based on
the operating performance of each property, including the review of occupancy
levels, operating budgets, estimated useful life and estimated future cash
flows. An impairment loss would be recognized when the sum of the expected
future net cash flows is less than the carrying amount of the asset. No such
impairment losses have been recognized during the years ended June 30, 1999
and 1998.
<PAGE> 22
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid financial instruments purchased with an original maturity of three
months or less to be cash equivalents.
Restricted Cash
Restricted cash is comprised of amounts held by lenders for payment of real
estate taxes, insurance, replacement reserves for the operating properties and
tenant security deposits that are invested in certificates of deposit.
Marketable Securities
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. All
marketable securities are defined as available-for-sale or trading securities
under the provisions of Statement of Financial Accounting Standards No. 115
("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities". The Company determines the appropriate classification of
marketable securities at the time of purchase and reevaluates such
designations at each balance sheet date. Securities classified as available-
for-sale are carried at fair market value, with the unrealized holding gains
and losses reported as other accumulated comprehensive income in a separate
component of shareholders' equity. Certain securities are classified as
trading securities to correspond with obligations for the same securities sold
short. These securities and the related obligations are marked to market with
unrealized holding gains and losses included in earnings.
The cost of investments sold is determined using the specific identification
method.
Obligation for Securities Sold
Obligation for securities sold represents the fair market value of shares sold
with the promise to deliver that security at some future date and the fair
market value of shares underlying the written call options with the obligation
to deliver that security when and if the option is exercised. The obligation
may be satisfied with current holdings of the same security or by subsequent
purchases of that security. Unrealized gains and losses from changes in the
obligation are included in earnings.
Rental Income
Rental income is recognized as earned. Revenue recognition from apartment
rentals commences when an apartment unit is placed in service and occupied by
a rent-paying tenant.
Income Taxes
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by
statutory tax rates. Deferred tax expense is the result of changes in the
asset and/or liability for deferred taxes.
<PAGE> 23
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, restricted cash, marketable
securities, other investments, prepaid expenses and other assets, accounts
payable and other liabilities approximates fair value. The fair value of
mortgage notes payable is estimated using discounted cash flows of future
payments based on the borrowing rates available to the Company for debt with
similar terms and maturities.
Stock-Based Compensation Plans
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based the value of the award
and is recognized over the service period, which is usually the vesting
period. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No.25 (APB 25), Accounting
for Stock Issued to Employees, whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the stock.
Stock options issued under the Company's stock option plan have no intrinsic
value at the grant date, and under APB 25 no compensation cost is recognized.
The Company has elected to continue with the accounting methodology in APB 25
and, as a result, has provided pro form disclosures of net income and earnings
per share and other disclosures, as if the fair value based method of
accounting had been applied.
Earnings Per Share
Basic earnings per share are computed by dividing net income available to
common stockholders by the weighted average number of commons shares
outstanding. The computation of diluted earnings per share is similar to the
computation of basic earnings per share except that the weighted-average
number of common shares is increased to include the number of additional
common shares that would have been outstanding if potential dilutive common
shares had been issued. The Company's only potentially dilutive common shares
are stock options. Stock options are included in diluted earnings per share
by application of the treasury stock method. As the Company reported a loss
for the year ended June 30, 1999, the inclusion of potentially dilutive common
shares related to stock options (75,000 shares at June 30, 1999), would be
anti-dilutive. Therefore, basic and diluted earnings per share for the year
ended June 30, 1999 are the same.
2. Investment in Real Estate:
At June 30, 1999, investments in real estate consisted of nine multi-family
apartment projects located throughout the United States, approximately 27.8
acres of primarily unimproved land held for sale or development, an apartment
complex owned by the Company and its majority owned subsidiary Santa Fe, and a
commercial real estate property that serves as the Company's corporate
headquarters. All of the projects are completed operating properties that are
directly owned by the Company and its subsidiary, Santa Fe.
<PAGE> 24
On October 2, 1998, the Company sold the two-story, 150 units apartment
complex located in Harrisburg, Pennsylvania for $3,763,000 for a realized gain
of $2,265,000. The sales price less the repayment of debt of $1,760,000,
closing and other expenses resulted in net proceeds of $1,569,000.
On April 20, 1999, the Company sold the two-story, 160 units apartment complex
located in San Antonio, Texas for $4,000,000 for a realized gain of $619,000.
The sales price less the repayment of debt of $2,330,000, closing costs and
other expenses resulted in net proceeds of $1,573,000.
On March 4, 1999, the Company acquired a 5,500 square foot, two story,
commercial real estate property located in Los Angeles for $1,876,000. The
property was acquired in connection with the sale of the Harrisburg,
Pennsylvania property in a partial 1031 tax-deferred exchange. This property
currently serves as the Company's new corporate headquarters.
The Company utilized a third party management company with national operations
to manage all of the Company's properties. On March 31, 1999, the Company
terminated its agreement with the management company and began to manage all
the properties in-house.
3. Marketable Securities:
For the year ended June 30, 1999, net investment losses of $6,450,000 were
comprised of gross gains and losses of $14,369,000 and $20,819,000,
respectively. For the year ended June 30, 1998, net investment gains of
$2,352,000 was comprised of gross gains and losses of $12,864,000 and
$10,512,000, respectively.
Available-for-Sale
At June 30, 1999, the aggregate market value of marketable securities
available-for-sale exceeded the aggregate cost by $13,467,000. The net
unrealized gain is comprised of gross unrealized gains of $25,550,000 reduced
by gross unrealized losses of $12,083,000. The net unrealized gain of
$8,080,000, net of deferred taxes of $5,387,000, is included as accumulated
other comprehensive income in a separate component of shareholders' equity.
Trading
For the year ended June 30, 1999 and 1998, net (losses)gains from trading
securities aggregated ($3,700,000) and $1,069,000, respectively. For the year
ended June 30, 1999 and 1998, net gains(losses) from short securities
aggregated $3,375,000 and ($3,161,000), respectively. For year ended June 30,
1998, gross gains from the transfers of marketable securities from available-
for-sale classification to a trading classification aggregated $1,069,000.
There were no such transfers for the year ended June 30, 1999.
Financial Instruments and Risk Management
The Company uses option contracts to hedge its investments in the underlying
common stock. The purpose of the hedge is to protect against adverse
movements in the underlying stock price. The Company sells call options
(writes covered calls) in order to hedge market exposure. As of June 30,
1999, the proceeds received from writing call options and the fair market
value of the obligation related to written call options aggregated $5,271,000
and $5,519,000, respectively. Generally accepted accounting principles
requires mark to market accounting for written call options with the
unrealized gain or loss related to written call options included in current
earnings. As of June 30, 1999, the Company recognized in current earnings a
loss of $248,000 related to written call options.
<PAGE> 25
The following is a summary of the Company's investment in marketable
securities at June 30, 1999:
<TABLE>
<CAPTION>
Net Unrealized Fair
Available-for-sale Cost Gain Value
- ------------------ ----------- -------------- -----------
<S> <C> <C> <C>
Equity securities $32,663,000 $13,430,000 $46,093,000
Debt securities 1,480,000 37,000 1,517,000
----------- -------------- -----------
Total Available-for-sale
Securities $34,143,000 $13,467,000 $47,610,000
Trading
- -----------------
Equity securities $ 1,003,000 $ 5,134,000 $ 6,137,000
</TABLE>
<TABLE>
<CAPTION>
The amortized and fair value of debt securities at June 30, 1999, by
contractual maturity, are as follows:
Cost Fair Value
---------- ----------
<S> <C> <C>
Due after one year through five years $ 843,000 $ 777,000
Due after five years through ten years 487,000 597,000
Due after ten years 150,000 143,000
---------- ----------
$1,480,000 $1,517,000
========== ==========
</TABLE>
4. Investment in Justice:
The consolidated accounts include a 49.8% interest in Justice Investors
("Justice"), a limited partnership. Justice owns the land improvements and
leasehold known as the Financial District Holiday Inn, a 566-room hotel in San
Francisco, California. PSI is both a limited and general partner in Justice
and records its investment in Justice on the equity basis.
<PAGE> 26
Condensed financial statements for Justice Investors are as follows:
Justice Investors
Condensed Balance Sheet as of June 30, 1999
Total current assets $ 1,154,000
Property, plant and equipment, net of accumulated
depreciation 5,389,000
Loan fees and deferred lease costs, net of
accumulated depreciation 178,000
Total Assets -----------
$ 6,721,000
===========
Liabilities and partners' capital
Total current liabilities $ 33,000
Long-term debt 500,000
Partners' capital 6,188,000
-----------
Total Liabilities and Partners' Capital $ 6,721,000
===========
Justice Investors
Condensed Results of Operations for the year ended June 30,
1999 1997
----------- -----------
Revenues $ 7,107,000 $ 6,861,000
Net income 6,212,000 5,840,000
5. Other Investments:
Other investments primarily consist of investments in corporations and
securities that are not traded on any exchange. Other investments are stated
at cost, net of reserve for loss of $758,000, which approximates fair value.
6. Mortgage Notes Payable:
At June 30, 1999, the Company had mortgage debt outstanding of $36,875,000.
Mortgage debt includes amortizing first mortgages maturing from May 2000
through December 2008 of $36,859,000 at fixed rates ranging from 6.6153% to
9.500%, and an amortizing second mortgage of $16,000 maturing in February
2001. Each mortgage is secured by its respective land and building. The
annual combined aggregate principal payments on the mortgage notes payable for
the five-year period commencing July 1, 1999 are as follows:
Year ending June 30,
2000 $ 5,742,000
2001 461,000
2002 489,000
2003 527,000
2004 4,861,000
Thereafter 24,795,000
-----------
Total $36,875,000
===========
At June 30, 1999 and 1998, the estimated fair value of the outstanding debt
was $36,126,000 and $37,538,000, respectively.
<PAGE> 27
7. Letter of Credit
Included in accounts payable and other liabilities is a letter of credit of
$2,000,000 that bears interest at prime (7.75% at June 30, 1999). The letter
of credit is secured by the 22.4 acres of land located in St. Louis, Missouri.
As of June 30, 1999, the outstanding balance of the letter of credit is
$2,000,000. The balance of the letter of credit is due September 21, 1999.
For the year ended June 30, 1999, total interest paid on the line of credit
was $68,000.
8. Due to Securities Broker:
Various security brokers have advanced funds for the purchase of, and are
secured by, marketable securities under standard margin agreements in
accordance with and subject to the limitations of 17CFR Section 240.15c3-3
under the Securities Exchange Act of 1934 and Section #220.6 of Regulation T
issued by the Board of Governors of the Federal Reserve System. The interest
rate on advances or cash on deposit can vary daily with money market rates.
The interest rate on margin balances is based on the Federal Funds rate plus
0.875% (6.745% at June 30, 1999). The interest rate on cash or deposits is
based on the Federal Funds rate less 0.5% (5.37% at June 30, 1999). The
interest rate on interest rebates in connection with short positions is based
on the Federal Funds rate less 0.375% (5.495% at June 30, 1999).
9. Income Taxes:
The provision for the Company's income taxes is comprised of the following:
Year Ended June 30,
1999 1998
---------- ----------
Current tax expense $ (800,000) $ (978,000)
Deferred tax benefit 1,805,000 44,000
---------- ----------
$1,005,000 $ (934,000)
========== ==========
The components of the deferred tax liability as of June 30, 1999, are as
follows:
Marketable securities basis differences $ 3,984,000
Depreciation and fixed asset basis differences 1,694,000
Minority interests 123,000
Miscellaneous 38,000
----------
Gross deferred tax liabilities 5,839,000
----------
State income taxes (90,000)
NOL and credit carryovers (2,254,000)
----------
Gross deferred tax (assets) (2,344,000)
----------
Net deferred tax liability $ 3,495,000
==========
<PAGE> 28
The provision for income taxes differs from the amount of income tax computed
by applying the federal statutory income tax rate to income before taxes as
a result of the following differences:
Year Ended June 30,
1999 1998
----------- -----------
Income tax at federal statutory rates $ 848,000 $ (635,000)
State income taxes, net of federal benefit 138,000 (122,000)
Change in valuation allowance and restatement
of deferred liabilities - (2,000)
Other 19,000 (175,000)
----------- -----------
Total income tax benefit(expense) $1,005,000 $ (934,000)
=========== ===========
At June 30, 1999, the Company has federal and state net operating loss
carryforwards of approximately $3,570,000 and $2,374,000, respectively. The
carryforwards expire in varying amounts through the year 2011.
10. Supplemental Cash Flow Information:
Cash paid for margin interest for the year ended June 30, 1999 and 1998 was
$531,000 and $994,000, respectively. Cash paid for interest on mortgage notes
payable for the year ended June 30, 1999 and 1998 was $2,567,000 and
$2,972,000, respectively. Cash paid for income taxes aggregated $84,000 and
$126,000 for the year ended June 30, 1999 and 1998, respectively.
11. Stock Options and Employee Stock Ownership Plan and Trust:
On December 8, 1998, the Company adopted and authorized a stock option plan
(the "1998 Non-employee Directors Plan") for non-employee directors. The
1998 Non-employee Directors Plan provides for the granting of stock options to
purchase shares of the Company's common stock to non-employee directors of the
Company. The aggregate number of shares to be delivered upon exercise of all
options granted under the Plan may not exceed 100,000. On December 8, 1999,
the Board of Directors of the Company granted a total of 32,000 stock options
to the directors of the Company at an exercise price of $12.00 per share. The
options vest over a period of 2 years and have a term of 10 years.
On December 22, 1998, the Company adopted and authorized a stock option plan
(the "1998 Key Officers Plan") for selected key officers. The 1998 Plan
provides for the granting of stock options to purchase shares of the Company's
common stock to key officers of the Company. The aggregate number of shares to
be delivered upon exercise of all options granted under the Plan may not
exceed 200,000. On December 22, 1998, the Board of Directors of the Company
granted a total of 150,000 stock options to the President and Chairman of the
Company at an exercise price of $11.875 per share. The options vest over a
period of 2 years and have a term of 10 years.
During the year ended June 30, 1998 the Company granted options to a
consulting firm to purchase 15,000 shares of its Common Stock, at exercise
prices ranging from $33 to $67 per share giving effect to the three-for-two
stock split which occurred in June 1999. The options vested immediately and
expire on February 22, 2001.
<PAGE> 29
Information relating to the stock options during the fiscal years ended June
30, 1999 and 1998 are as follows:
Number of Weighted-average
Shares Exercise Price
---------- --------------
Unexercised options
outstanding at June 30, 1997: - -
Granted 15,000 $52.67
Exercised - -
Forfeited - -
-------- --------
Unexercised options
outstanding at June 30, 1998: 15,000 $50.00
Granted 182,000 $11.90
Exercised - -
Forfeited - -
-------- --------
Unexercised options
outstanding at June 30, 1999: 197,000 $15.00
========= =========
Range of Weighted Average Weighted Average
Exercise Options Exercise Price Exercise Price Remaining Life
- ---------------- -------------- ---------------- ----------------
June 30, 1998 $33.00-$67.00 $52.67 1.68 years
June 30, 1999 $11.88-$67.00 $15.00 9.36 years
As required by FAS 123, the company has determined the pro-forma information
as if the company had accounted for stock options granted since January 1,
1998, under the fair value method of FAS 123. The Black-Scholes option pricing
model was used with the following weighted-average assumptions for 1999; risk-
free interest rate if 5.28%; dividend yield of 0%; expected Common Stock
market price volatility factor of 48.42; and a weighted-average expected life
of the options of 10 years. The weighted-average fair value of options granted
in fiscal year 1999 was $7.87 per share. The aggregate fair value of the
options granted in fiscal year 1999 was $1,433,000.
Stock based compensation is accounted under APB 25 and accordingly, no
compensation cost has been recognized for stock options in the financial
statements. Had compensation cost been determined based upon the fair value
of the stock options at grant date and consistent with FAS 123, the Company's
pro forma net loss and loss per share (based on 102,200 options vested for
fiscal year 1999) are as follows:
Net loss - as reported ($1,737,000)
Net loss - pro forma ($2,529,000)
Loss per share - as reported ($0.83)
Loss per share - pro forma ($1.21)
The pro forma effect of options granted in fiscal 1998 on net earnings and
earnings was not material.
In April 1986, the Company established an Employee Stock Ownership Plan and
Trust ("ESOP" or the "Plan"), effective July 1985, which enabled eligible
employees to receive an ownership interest in stock of the Company. The
Company did not make ESOP contributions during fiscal 1999 or 1998. The
Company distributed 1,680 shares(adjusted for stock split) to terminated
employees during fiscal 1998. Effective November 15, 1998, the Plan was
terminated and the interest of each participant was fully vested and
nonforfeitable. The Plan benefits will be distributed in due course following
appropriate governmental filings and approvals, notices to participants, and
other procedures and actions considered appropriate by the Company. The
termination of the Plan did not have a material effect on the financial
statements of the Company.
<PAGE> 30
12. Stock Split in the Form of a Dividend:
On August 31, 1998, the Company's Board of Directors approved another three-
for-two stock split of the Company's $.01 par value Common Stock in the form
of a stock dividend. The dividend was paid in shares of the Company's Common
Stock on October 9, 1998 to shareholders of record as of September 23, 1998.
Where applicable, the Company's financial statements have been restated to
reflect the effect of the stock split.
On June 5, 1998 the Board of Directors approved a three-for-two stock split of
the Company's $.01 par value Common Stock in the form of a stock dividend.
The dividend was paid in shares of the Company's Common Stock on June 30, 1998
to shareholders of record as of June 16, 1998.
On August 31, 1998 the Board of Directors authorized an amendment to the
Company's Certificate of Incorporation which increased the number of shares of
$.01 par value per share, Common Stock, that the Company is authorized to
issue from 1,500,000 shares to 4,000,000 shares. The amendment also increased
the authorized number of shares of Preferred Stock from 100,000 shares to
2,500,000 shares and changed the par value of the Preferred Stock from $0.10
to $0.01. In addition, the amendment gave the Company the authorization to
issue 2,500,000 shares of $0.01 par value, Class A Common Stock.
13. Commitments and Contingencies:
The lease on the Company's corporate headquarters expired on May 31, 1999.
Rent expense was approximately $127,000 in 1999 and $169,000 in 1998.
On February 22, 1995, the Company was named as a defendant in a shareholders'
derivative suit filed against Santa Fe and certain directors of Santa Fe,
arising out of the Company's investment in Santa Fe. On December 31, 1996, a
final judgment was entered in favor of the Company. On June 9, 1997, the
Company was awarded $296,000 in attorneys' fees and costs as a prevailing
party in that litigation. That award was made effective as of April 25, 1997
and bears interest at the statutory rate of 10%. That judgment and the award
of attorneys' fees were appealed. On August 27, 1999, the Court of Appeal
filed its opinion affirming the judgment and award of attorneys' fees and
costs in favor of InterGroup. On September 13, 1999, the plaintiff filed a
Petition for Rehearing of that appeal.
On July 3, 1997, the Court of Appeal, granted the director defendants'
petition for a writ of mandate and directed the trial court to enter an order
granting their motion for summary judgment. The Court of Appeal's decision
became final on August 2, 1997, and plaintiffs' petition for review was denied
by the California Supreme Court on October 15, 1997.
As prevailing parties, the director defendants and Santa Fe also made
application to the Superior Court for recovery of the attorneys' fees and
costs expended in their successful defense of this litigation. On March 13,
1998, the trial court granted the applications for attorneys' fees and costs
in the total amount of $936,000. On March 24, 1998 a judgment was entered in
favor of the director defendants and Santa Fe which made the award of
attorneys' fees and costs effective as of February 20, 1998. The award bears
interest at the statutory rate of 10%. That judgment was appealed and the
parties are waiting for the Court of Appeal to schedule oral argument.
The Company is a defendant or co-defendant in various other legal actions
involving various claims incident to the conduct of its business. Most of
these claims are covered by insurance. Management does not anticipate the
Company to suffer any material liability by reason of such actions.
<PAGE> 31
14. Related Party Transactions:
On April 26, 1999, the Executive Committee of the Company authorized a short-
term loan from the Company to the Company's Chairman and President in the
amount of $426,000 at an interest rate equal to the prime rate, as of the date
of the loan, plus one percent (8.75%). All principal and interest under the
loan was due on May 31, 1999. The loan was repaid in full with interest on
May 31, 1999.
On January 4, 1999, the Executive Committee of the Company authorized a short-
term loan from the Company to the Company's Chairman and President in the
amount of $350,000 at an interest rate equal to the prime rate, as of the date
of the loan, plus one percent (9.5%). All principal and interest under the
loan was due on March 31, 1999. The loan was repaid in full with interest on
March 31, 1999.
Gary N. Jacobs, a Director of the Company, is a senior partner of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP which provided legal
services to the Company during the years ended June 30, 1999 and 1998.
During the years ended June 30, 1999 and 1998, the Company made payments of
approximately $269,750 and $86,000, respectively to Christensen, Miller, Fink,
Jacobs, Glaser, Weil & Shapiro, LLP.
On June 30, 1998, the Company's Chairman and President entered into a voting
trust agreement with the Company giving the Company the power to vote on his
3.7% interest in the outstanding shares of the Santa Fe common stock.
In May 1996, the Company's Chairman and President exercised options to
purchase 187,500 shares of Common Stock at a price of $7.67 per share through
a full recourse note due the Company on demand, but in no event later than May
2001. The note bears interest floating at the lower of 10% or the prime rate
(8.50% at June 30, 1999) with interest payable quarterly. The balance of the
note receivable of $1,438,000 is reflected as a reduction of shareholders'
equity at June 30, 1999. During the fiscal year ended June 30, 1999 and 1998,
the President of the Company made interest payments of approximately $131,000
and $122,000, respectively in connection with the note relating to his 1996
exercise of stock options.
15. Extraordinary Item:
During the year ended June 30, 1999 the Company sold two of its properties and
refinanced one of its properties. The Company incurred $399,000 in prepayment
penalties and $98,000 in expense related to the write-off of deferred loan
costs associated with loans paid off in connection with the sale of the two
properties and refinancing. These expenses are partially offset by a $199,000
income tax benefit.
16. Subsequent Events:
In December 1998, the Company entered into a contract to sale the 22.4 acres
of land located in St. Louis, Missouri for $5,450,000. The sale was completed
in September 1999 and the Company realized a gain of approximately $3,329,000.
The Company received net proceeds of $3,185,000 after the repayment of the
$2,000,000 letter of credit. Of the net proceeds, $2,332,000 are being held
in escrow pending a 1031 tax-deferred exchange. In September 1999, the
Company entered into contracts to purchase a 14-unit multi-family apartment
complex for $2,150,000 and a 9-unit multi-family apartment complex for
$1,675,000 in connection with the 1031 tax-deferred exchange. Both properties
are located in Los Angeles, California. The purchases are expected to be
completed in or before November 1999.
<PAGE> 32
In April 1999, the Company entered into a contract to sell the two-story, 150-
unit apartment complex located in Middletown, Ohio for $3,425,000. The sale
was completed in July 1999 and the Company realized a gain of approximately
$2,374,000. The Company received net proceeds of $815,000 after the repayment
of the underlying mortgage of $2,440,000. Net proceeds of $815,000 are being
held in escrow pending a 1031 tax-deferred exchange. In August 1999, the
Company entered into a contract to purchase a 190-unit multi-family apartment
complex located in Austin, Texas for $4,150,000 in connection with the 1031
tax-deferred exchange. The purchase is expected to be completed in November
1999.
In April 1999, the Company entered into a contract to sell the three-story,
100-unit apartment complex located in Cincinnati, Ohio for $3,125,000. The
sale was completed in July 1999 and the Company realized again of
approximately $2,130,000. The Company received net proceeds of $1,736,000
after the repayment of the underlying mortgage of $1,736,000. Net proceeds of
$1,736,000 are being held in escrow pending a 1031 tax-deferred exchange. In
July 1999, the Company entered into a contract to purchase a 27-unit multi-
family apartment complex located in Santa Monica, California for $4,075,000 in
connection with the 1031 tax-deferred exchange. The purchase is expected to
be completed in September 1999.
In June 1999, the Company entered into a contract to purchase a 12-unit multi-
family apartment complex located in Santa Monica, California for $1,305,000.
The purchase was completed in July 1999.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE> 33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information with respect to the
Directors and Executive Officers of the Company as of June 30, 1999:
<TABLE>
<CAPTION>
Position with
Name the Company Age Term to Expire
- ------------------ ------------------ --- -----------------
Class A Directors:
<S> <C> <C> <C>
John V. Winfield Chairman of the Board; 52 2000 Annual Meeting
(1)(4)(5)(6)(7) President and Chief
Executive Officer
Josef A.
Grunwald(2)(3)(5)(7) Director 51 2000 Annual Meeting
Class B Directors:
Gary N. Jacobs
(1)(6)(7) Secretary; Director 53 2001 Annual Meeting
William J. Nance (1)
(2)(3)(4)(6)(7) Treasurer; Director 55 2001 Annual Meeting
Class C Directors:
Mildred Bond
Roxborough(2) Director 72 1999 Annual Meeting
John C. Love (3)(4) Director 59 1999 Annual Meeting
Other Executive
Officers:
Gregory C. McPherson Executive Vice 40 N/A
President;
Assistant Treasurer
Michael G. Zybala Vice President 47 N/A
Operations;
Assistant Secretary
- ------------------
</TABLE>
(1) Member of the Executive Committee
(2) Member of the Administrative and Compensation Committee
(3) Member of the Audit and Finance Committee
(4) Member of the Real Estate Investment Committee
(5) Member of the Nominating Committee
(6) Member of the Securities Investment Committee
(7) Member of the Special Strategic Options Committee
<PAGE> 33
Business Experience:
The principal occupation and business experience during the last five
years for each of the Directors and Executive Officers of the Company
are as follows:
John V. Winfield -- Mr. Winfield was first appointed to the Board in
1982. He currently serves as the Company's Chairman of the Board,
President and Chief Executive Officer, having first been appointed as
such in 1987. Mr. Winfield also serves as President, Chairman and Chief
Executive Officer of Santa Fe Financial Corporation ("Santa Fe") and
Portsmouth Square, Inc. ("Portsmouth") and Chairman of the Board of
Healthy Planet Products, Inc. ("Healthy Planet"), all public companies.
Josef A. Grunwald -- Mr. Grunwald is an industrial, commercial and
residential real estate developer. He serves as Chairman of PDG N.V.
(Belgium), a hotel management company, and President of I.B.E. Services
S.A. (Belgium), an international trading company. Mr. Grunwald was
first elected to the Board in 1987. Mr. Grunwald is also a Director of
Portsmouth.
William J. Nance -- Mr. Nance is a Certified Public Accountant and
private consultant to the real estate and banking industries. He also
serves as President of Century Plaza Printer, Inc. Mr. Nance was first
elected to the Board in 1984. He was appointed Treasurer, Chief
Operating Officer and Chief Financial Officer in 1987. Mr. Nance
resigned as Chief Operating Officer and Chief Financial Officer in
January 1990 but continues to serve as Treasurer. Mr. Nance is also a
Director of Santa Fe, Portsmouth and Healthy Planet.
Mildred Bond Roxborough -- Ms. Roxborough was Director of Development
and Special Programs of the National Association for the Advancement of
Colored People (NAACP) from 1986 to 1997. She also served as Vice
Chairman of the Board of Directors of America's Charities Federation,
Chairman of its Membership and Personnel Committees and member of its
Long Range Planning Committee; and Member of the Board of Directors of
Morningside Health and Retirement Service, Member of Personnel Committee
of Morningside Heights Housing Corporation. Since 1997 Ms. Roxborough
has served as a consultant to the NAACP. Ms. Roxborough was first
appointed to the Company's Board in 1984 and served as Vice Chairman
from 1987 through 1994.
Gary N. Jacobs -- Mr. Jacobs was appointed to the Board and as Secretary
in 1998. Mr. Jacobs is a senior partner of the law firm of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, where he heads the
corporate department. Mr. Jacobs graduated summa cum laude from
Brandeis University and from Yale Law School, where he was Order of the
Coif. He is a Trustee of the Natural History Museum of Los Angeles
County and a member of the Board of Overseers of Brandeis University's
Graduate School of International Economics and Finance. Mr. Jacobs is
Secretary of Youbet.com, Inc. (Nasdaq-NMS).
John C. Love -- Dr. Love was appointed to the Board in 1998. He is an
independent consultant to the hospitality and tourism industries and was
formerly a general partner in the national CPA and consulting firm of
Pannell Kerr Forster. He is Chairman Emeritus of the Board of Trustees
of Golden Gate University in San Francisco. Dr. Love is also a Director
of Santa Fe and Portsmouth.
<PAGE> 35
Gregory C. McPherson -- Mr. McPherson joined the Company in 1993.
Prior to joining the Company, Mr. McPherson was a private financial and
strategic advisor, served as Vice President in the Investment Banking
and Corporate Finance Department of Kemper Securities Group, Inc., was
with Prudential Bache Capital Funding in their Mergers and Acquisitions
and Financial Restructuring Group and was a manager at the public
accounting firm of PricewaterhouseCoopers LLP. Mr. McPherson received an
M.B.A. from the Harvard Business School and is a Certified Public
Accountant. Mr. McPherson also serves as a special consultant to Portsmouth.
Michael G. Zybala -- Mr. Zybala was appointed Vice President Operations and
Assistant Secretary of the Company on January 27, 1999. Mr. Zybala is an
attorney at law and has served as a special legal consultant to the Company.
Mr. Zybala is also the Vice President and Secretary of Santa Fe and Portsmouth
and has served as their General Counsel since 1995. Mr. Zybala has provided
legal services to Santa Fe and Portsmouth since 1978. Mr. Zybala is also a
Director of Healthy Planet and has served as its Secretary since August 1998.
There are no family relationships among directors, executive officers, or
persons nominated or chosen by the Company to become directors or officers. No
director or executive officer was involved in any legal proceeding requiring
disclosure.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and each beneficial owner of more than ten percent of
the Common Stock of the Company, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors
and greater than ten-percent shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that during fiscal 1999 all
filing requirements applicable to its officers, directors, and greater than
ten-percent beneficial owners were complied with.
<PAGE> 36
Item 10. Executive Compensation.
The following table provides certain summary information concerning
compensation paid to or accrued by the Company to the Executive Officers
and one employee of the Company who earned more than $100,000 (salary
and bonus) for all services rendered to the Company and its subsidiaries
for fiscal years 1999, 1998 and 1997. There are currently no employment
contracts with the Executive Officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Awards
------
Securities
Name and Principal Other Annual Underlying
Position Year Salary Bonus Compensation Options/SARs
- ------------------- ------ ------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
John V. Winfield
Chairman; President 1999 $257,290(1) - $56,200(2) 150,000
and Chief Executive 1998 $102,078 - $43,193(2)
Officer 1997 $102,078 - $29,693(2)
Gregory C. McPherson 1999 $ 82,131(3) $10,000 -
Executive Vice President; 1998 $ 97,656(3) $10,000 -
and Assistant Treasurer 1997 $ 97,082(3) - -
Michael G. Zybala
Vice President Operations 1999 $118,850(4) $10,000 -
David C. Gonzalez 1999 $120,000 $55,000 -
Director of Real Estate 1998 $105,000 $60,000
- ---------------------
</TABLE>
(1) Mr. Winfield is the President and Chairman of the Board of Santa Fe
and Portsmouth, and also received total compensation of $217,521, $114,084 and
$114,084 (including directors fees and insurance benefits)from those entities
during fiscal years 1999, 1998 and 1997, respectively.
(2) Amounts include an auto allowance and compensation for a portion of the
salary of an assistant. The auto allowance was $29,700, $29,193 and $29,693
during fiscal years 1999, 1998 and 1997, respectively. The amount of
compensation related to the assistant was approximately $26,500 and $14,000
during fiscal years 1999 and 1998 respectively. During fiscal 1999, the
Company also paid premiums in the amount of $42,577 for a split dollar whole
life insurance policy owned by, and the beneficiary of which is, a trust for
the benefit of Mr. Winfield's family. The Company has a secured right to
receive, from any proceeds of the policy, reimbursement of all premiums paid
prior to any payment to the beneficiary.
(3) Mr. McPherson is a consultant of Portsmouth and received consulting
fees of $88,200, $88,200 and $86,282 during fiscal years 1999, 1998 and 1997,
respectively.
(4) Mr. Zybala became Vice President Operations in January 1999. His salary
is allocated 30% to the Company and 70% to Santa Fe and Portsmouth.
<PAGE> 37
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table contains information concerning individual grants of stock
options or Stock Appreciation Rights ("SARs") made during the last completed
fiscal year to each of the named executive officers.
<TABLE>
<CAPTION>
Number of Secu- Percent of Total
rities Underlying Options/SARs
Options/SARs Granted To Exercise of
Granted Employees In Base Price Expiration
Name (#) Fiscal Year ($/Sh) Date
---- ----------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
John V. Winfield 150,000(1) 100% $11.875 12/21/08
- ----------------
</TABLE>
(1) On December 22, 1998 Mr. Winfield was granted options to purchase up to
150,000 shares of the Common Stock of the Company at an exercise price of
$11.875 per share, which was the closing price of the Common Stock on the date
of grant. The term of the options is for the period beginning December 22,
1998 and ending on December 21, 2008. No options may be exercised prior to
June 8, 1999 and vest according to the following schedule: December 22, 1998 -
37,500 shares; January 27, 1999 - 37,500 shares; December 22, 1999 - 37,5000
shares; December 22, 2000 - 37,500 shares.
AGGREGATE OPTIONS/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
The following table contains information concerning each exercise of stock
options (or tandem SARs) and freestanding SARs during the last completed
fiscal year by each of the named executive officers and the fiscal year-end
value of unexercised options and SARs.
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options/SARs as of In-the-Money Options/
Name Exercise (#) Realized ($) June 30, 1999 at June 30, 1999
- ---- ------------ ----------- ----------------------- --------------------
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C> <C> <C>
John V.
Winfield - $ - 75,000/75,000 $9,375/$9,375(1)
- --------------
</TABLE>
(1) Based on the closing price of the Company's Common Stock on June 30, 1999
of $12.00 per share.
1998 Stock Option Plan for Non-Employee Directors
On December 8, 1998, the Board of Directors of the Company adopted, subject to
stockholder approval and ratification, a 1998 Stock Option Plan for Non-
employee Directors (the "Plan"). The stockholders ratified that plan on
January 27, 1999.
<PAGE> 38
The stock to be offered under the Plan shall be shares of the Company's Common
Stock, par value $.01 per share, which may be unissued shares or treasury
shares. Subject to certain adjustments upon changes in capitalization, the
aggregate number of shares to be delivered upon exercise of all options
granted under the Plan shall not exceed 100,000 shares. The Plan shall
terminate on the earliest to occur of (i) the dates when all of the Common
Stock available under the Plan shall have been acquired through the exercise
of options granted under the Plan; (ii) 10 years after the date of adoption of
the Plan by the Board; or (iii) such other date that the Board may determine.
Pursuant the Plan, each non-employee director as of the adoption date of the
Plan shall be granted on the date thereof: (i) if he or she became a non-
employee director prior to January 1, 1998, an option to purchase 8,000 shares
of Common Stock; and (ii) if he or she became a non-employee director on or
after January 1, 1998, an option to purchase 4,000 shares of Common Stock.
Each new non-employee director who is elected to the Board shall automatically
be granted an option to purchase 4,000 shares of Common Stock upon the initial
date of election to the Board. On each July 1 following the adoption date,
each non-employee director shall be granted an option to purchase 2,000 shares
of Common Stock provided he or she holds such position on that date and the
number of Common Shares available for grant under the Plan is sufficient to
permit such automatic grant.
The exercise price of the option shall be determined at the time of grant and
shall not be less than 100% of the fair market value of the Common Stock at
the time of the grant of the option. The term of the option shall be for ten
years. Options granted to any non-employee director will not vest 100% until
such person has been a member of the Board for four (4) years or more. Non-
employee directors who have been a member of Board less than four (4) years,
shall be vested with respect to 20% of the options on the date of grant and
20% on each anniversary of such person having become a member of the Board,
provided that the optionee is on each such date serving as a member of the
Board or as an employee or consultant to the Company.
Pursuant to the plan, the following non-employee directors of the Company were
granted options during fiscal 1999 to purchase shares of Common Stock: Josef
A. Grunwald (8,000 shares); William J. Nance (8,000 shares); Mildred Bond
Roxborough (8,000 shares); Gary N. Jacobs (4,000 shares); and John C. Love
(4,000 shares). The exercise price for the options is $12.00 per share, which
was the closing price of the Company's Common Stock on the Nasdaq National
Market System as of the date of grant on December 8, 1998.
1998 Stock Option Plan for Selected Key Officers,
Employees and Consultants
On December 8, 1998, the Board of Directors of the Company adopted, subject to
shareholder approval and ratification, a 1998 Stock Option Plan for selected
key officers, employees and consultants (the "Key Employee Plan"). The Key
Employee Plan was ratified by the stockholders on January 27, 1999.
<PAGE> 39
The stock to be offered under the Key Employee Plan shall be shares of the
Company's Common Stock, par value $.01 per share, which may be unissued shares
or treasury shares. Subject to certain adjustments upon changes in
capitalization, the aggregate number of shares to be delivered upon exercise
of all options granted under the Key Employee Plan shall not exceed 200,000
shares. The Key Employee Plan shall terminate on the earliest to occur of (i)
the dates when all of the Common Stock available under the Key Employee Plan
shall have been acquired through the exercise of options granted under the Key
Employee Plan; (ii) 10 years after the date of adoption of the Key Employee
Plan by the Board; or (iii) such other date that the Board may determine.
The Key Employee Plan is administered by a Committee appointed by the
Board of Directors which consists of two or more disinterested persons
within the meaning of Rule 16b-3 promulgated pursuant to the Securities
Exchange Act of 1934 (the "Exchange Act"). Persons eligible to receive
options under the Key Employee Plan shall be employees who are selected by the
Committee. In determining the Employees to whom options shall be granted and
the number of shares to be covered by each option, the Committee shall take
into account the duties of the respective employee, their present and
potential contribution to the success of the Company, their anticipated number
of years of active service remaining and other factors as it deems relevant in
connection with accomplishing the purposes of the Key Employee Plan. An
employee who has been granted an option may be granted an additional option or
options as the Committee shall so determine.
The exercise price of the option shall be determined at the time of grant and
shall not be less than 100% of the fair market value of the Common Stock at
the time of the grant of the option. The term of the option shall not exceed
10 years from the date on which the option is granted. The vesting schedule
for the options and the method or time that when the option may be exercised
in whole or in part shall be determined by the Committee. However, in no
event shall an option be exercisable within six months of the date of grant in
the case of an optionee subject to Section 16(b) of the Exchange Act. Subject
to certain exceptions, the option shall terminate six months after the
optionee's employment with the Company terminates. As discussed above,
options to purchase 150,000 shares were granted to the Company's CEO during
fiscal 1999 pursuant to the Key Employee Plan.
Employee Stock Ownership Plan and Trust ("ESOP")
In April 1986, the Company established an Employee Stock Ownership Plan
and Trust ("ESOP" or the "Plan"), effective July 1985, which enabled
eligible employees to receive an ownership interest in Common Stock of the
Company. The Company did not make any ESOP contributions during fiscal year
1999, made $816 in ESOP contributions during fiscal year 1998 and no
contributions in fiscal year 1997. The Company made distributions of 1,680
shares (adjusted for splits) to terminated employees during fiscal year 1998
and made no distributions during fiscal years 1999 and 1997. Effective
November 15, 1998, the Plan was terminated and the interest of each
participant was fully vested and nonforfeitable. The Plan benefits will be
distributed in due course following appropriate governmental filings and
approvals, notices to participants, and other procedures and actions
considered appropriate by the Company.
<PAGE> 40
Phantom Stock Program
The Company maintained a "phantom" stock program that provides for the
issuance of 90,000 units (adjusted for split) with each unit being
equivalent to one share of Common Stock. Participating members of the
program are credited with the incremental value in shares of common
stock and dividend equivalents over a five-year period from the date of
award. One-fifth of such credits to participants' accounts will vest on
the first anniversary date of the award and an additional one-fifth vest
on each of the next four anniversary dates. No units were granted in
fiscal year 1998 or fiscal year 1997. As of June 30, 1998, no units were
outstanding. The Company terminated the phantom program effective December 3,
1998.
1987 Stock Incentive Plan
In 1987, the Board approved a Stock Incentive Plan providing for the
issuance of up to 281,250 shares (adjusted for split) of the Company's Common
Stock pursuant to the exercise of the stock options granted under
the plan. The Plan also provided for the issuance of SARs that may be
granted in connection with or without relation to the stock options.
The plan was approved by the Company's shareholders in 1988. In
conjunction with the Stock Incentive Plan, the Board and shareholders
approved the grant of an option to the Company's President for the
purchase of 281,250 shares (adjusted for split) of Common Stock at an
exercise price of $5.11 (adjusted for split). During fiscal year 1996,
the Company's President fully exercised his option. No additional
options or SARs were granted under this plan, and no options to purchase
shares of Common Stock remain outstanding. The plan expired August 1,
1998.
Compensation of Directors
The Company's arrangements for compensation of Directors is as follows:
the Chairman of the Board of Directors is eligible to receive $9,000 per
annum; each Director is eligible to receive a fee of $6,000 per annum
and a fee of $500 for each Board or committee meeting attended; and each
Director who is a chairman of a committee of the Board of Directors is
eligible to receive $600 for each committee meeting which he or she
chairs. The Directors who are also Executive Officers do not receive
any fee for attending either meetings of the board or of any Board
committee. As an Executive Officer, the Company's Chairman has also
elected to forego his annual board fee. The Directors are also eligible for
grants of options to purchase shares of the Company's Common Stock pursuant to
the 1998 Stock Option Plan for Non-Employee Directors.
Except for the foregoing, there are no other arrangements for compensation of
Directors and there are no employment contracts between the Company and its
Directors.
<PAGE> 41
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of September 20, 1999, certain
information with respect to the beneficial ownership of Common Stock
owned by (i) those persons or groups known by the Company to own more
than five percent of the outstanding shares of Common Stock, (ii) each
Director and Executive Officer, and (iii) all Directors and Executive
Officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Owner(1) Percentage(2)
- -------------------- ---------------------- --------------
<S> <S> <C>
John V. Winfield 1,000,938(3) 48.8%
820 Moraga Drive
Los Angeles, CA 90049
Josef A. Grunwald 83,045 4.2%
820 Moraga Drive
Los Angeles, CA 90049
William J. Nance 48,250 2.4%
820 Moraga Drive
Los Angeles, CA 90049
Mildred Bond Roxborough 12,350 *
820 Moraga Drive
Los Angeles, CA 90049
Gary N. Jacobs 4,250 *
820 Moraga Drive
Los Angeles, CA 90049
John C. Love 2,000 *
820 Moraga Drive
Los Angeles, CA 90049
Gregory C. McPherson 8,993(4) *
820 Moraga Drive
Los Angeles, CA 90049
Michael G. Zybala 0 *
820 Moraga Drive
Los Angeles, CA 90049
All Directors and
Executive Officers as a
Group (8 persons) 1,159,827 55.6%
- ------------------
* Ownership does not exceed 1%.
(1) Unless otherwise indicated and subject to applicable community
property laws, each person has sole voting and investment power with
respect to the shares beneficially owned.
(2) Percentages are calculated on the basis of 1,976,987 shares of
Common Stock outstanding at September 20, 1998, plus any securities that
person has the right to acquire within 60 days pursuant to options, warrants,
conversion privileges or other rights.
(3) Includes 31,113 shares allocated to Mr. Winfield under the ESOP and
75,000 shares of which Mr. Winfield has the right to acquire pursuant to
options. Does not include an additional 15,151 shares held by the ESOP with
respect to which Mr. Winfield, as trustee, would have the power to vote if
voting instructions are not provided by the participants on a timely basis.
(4) Includes 3,594 shares allocated to Mr. McPherson under the ESOP.
<PAGE> 42
Item 12. Certain Relationships and Related Transactions.
On April 26, 1999, the Executive Committee of the Company authorized a short-
term loan from the Company to the Company's Chairman and President in the
amount of $426,000 at an interest rate equal to the prime rate, as of the date
of the loan, plus one percent (8.75%). All principal and interest under the
loan was due on May 31, 1999. The loan was repaid in full with interest on
May 31, 1999.
On January 4, 1999, the Executive Committee of the Company authorized a short-
term loan from the Company to the Company's Chairman and President in the
amount of $350,000 at an interest rate equal to the prime rate, as of the date
of the loan, plus one percent (9.5%). All principal and interest under the
loan was due on March 31, 1999. The loan was repaid in full with interest on
March 31, 1999.
On December 4, 1998, the Administrative and Compensation Committee authorized
the Company to obtain whole life and split dollar insurance policies covering
the Company's President and Chief Executive Officer, Mr. Winfield. During
fiscal 1999, the Company paid premiums in the amount of $42,577 for the split
dollar whole life insurance policy owned by, and the beneficiary of which is,
a trust for the benefit of Mr. Winfield's family. The Company has a secured
right to receive, from any proceeds of the policy, reimbursement of all
premiums paid prior to any payments to the beneficiary.
On June 30, 1998, the Company's Chairman and President entered into a voting
trust agreement with the Company giving the Company the power to vote on his
3.7% interest in the outstanding shares of the Santa Fe common stock.
In May 1996, the Company's Chairman and President exercised options to
purchase 421,875 shares(adjusted for stock splits) of Common Stock at a price
of $3.41(adjusted for stock splits) per share through a full recourse note due
the Company on demand, but in no event later than May 2001. The note bears
interest floating at the lower of 10% or the prime rate (8.50% at June 30,
1999) with interest payable quarterly. The balance of the note receivable of
$1,438,000 is reflected as a reduction of shareholders' equity at June 30,
1999. During the fiscal year ended June 30, 1999 and 1998, the President of
the Company made interest payments of approximately $131,000 and $122,000,
respectively in connection with the note relating to his 1996 exercise of
stock options.
The Company's Chairman and President directs the investment activity of
the Company, Santa Fe and Portsmouth in public and private markets
pursuant to authority granted by the Board of Directors of each entity.
Depending on certain market conditions and various risk factors, the
President and members of his immediate family may at times invest in the
same companies in which the Company, Santa Fe and Portsmouth invest.
The Company, Santa Fe and Portsmouth encourage such investments because
it places personal resources of the President and his family members at
risk in connection with investment decisions made on behalf of the
Company, Santa Fe and Portsmouth. Following allegations concerning the
President made by a former officer and director of the Company, the
Board of Directors authorized committees of the Board to conduct a
thorough and independent review of such matters, including the Company's
practices in this regard. The committee advised the Board of Directors
that it found the material allegations of improprieties made by the
former officer and director could not be substantiated. The committee
made recommendations that the Company institute certain modifications to
its existing procedures to reduce the potential for conflicts of
interest. The Company's Board of Directors has adopted these
recommendations.
<PAGE> 43
Gary N. Jacobs, a Director of the Company, is a senior partner of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP which provided legal
services to the Company during the years ended June 30, 1999 and 1998.
During the years ended June 30, 1999 and 1998, the Company made payments of
approximately $269,750 and $86,000, respectively to Christensen, Miller, Fink,
Jacobs, Glaser, Weil & Shapiro, LLP.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits:
3. Certificate of Incorporation and By-Laws **
Restated Certificate of Incorporation dated February 20, 1998 is
incorporated herein by reference to the Company's Form 10-QSB Report
filed with the Securities and Exchange Commission on May 15, 1998.
4. Instruments defining the rights of security holders, including
Indentures **
9. Voting Trust Agreement
Voting Trust Agreement dated June 30, 1998 between John V. Winfield and
The Intergroup Corporation is incorporated by reference to the Company's
Form 10-KSB Annual Report filed with the Securities and Exchange
Commission on September 28, 1998.
10. Material Contracts
(a) Stock Option Agreement dated December 19, 1984 between the Trust and
John V. Winfield *
(b) Share of Beneficial Interest Unit Plan ("phantom stock program")
as approved by the shareholders on February 11, 1985 *
(c) Employee Stock Ownership Plan and Trust Agreement ***
(d) Stock Appreciation Rights Agreement dated April 22, 1987 as approved
by shareholders on August 1, 1988 ****
(e) Note and Exercise Agreement from Mr. John V. Winfield dated May 17,
1996 *****
(f) 1998 Stock Option Plan for Non-Employee Directors approved by the
Board of Directors on December 8, 1998 and ratified by the
shareholders on January 27, 1999 ******
(g) 1998 Stock Option Plan for Selected Key Officers, Employees and
Consultants approved by the Board of Directors on December 8, 1998
and ratified by the shareholders on January 27, 1999 ******
21. Subsidiaries:
(1) Intergroup Summit Hills, Inc. (incorporated on August 12, 1993 in TX)
(2) Intergroup Mariposa, Inc. (incorporated on June 23, 1994 in TX)
(3) Intergroup Arlington Arms, Inc. (incorporated on August 5, 1993 in TX)
(4) Intergroup Woodland Village, Inc. (incorporated on August 5, 1993 in OH)
(5) Intergroup Cross Keys, Inc. (incorporated on April 1, 1994 in MO)
(6) Intergroup Bridgeton, Inc. (incorporated on May 12, 1994 in MO)
(7) Intergroup Whisperwood, Inc. (incorporated on June 20, 1994 in PA)
(8) Intergroup Eagle Creek, Inc. (incorporated on April 15, 1994 in TX)
(9) Intergroup Entertainment Corp. (incorporated on December 23, 1993 in DE)
<PAGE> 44
(10) Mutual Real Estate Corp. (incorporated on March 10, 1994 in TX)
(11) WinGroup Capital (incorporated on September 21, 1994 in CA)
(12) Broadview Enterprises, Inc. (incorporated April 14, 1995 in MO)
(13) Wayward, Inc. (incorporated April 18, 1995 in MO)
(14) Golden West Entertainment, Inc. (incorporated February 15, 1990 in CA)
(15) Golden West Television Productions, Inc. (incorporated September 17, 1991
in CA)
(16) Golden West Television Productions, Inc. (incorporated March 17, 1986 in
NY)
(17) Intergroup The Trails, Inc. (incorporated on September 14, 1994 in TX)
(18) Intergroup Meadowbrook Gardens, Inc. (incorporated on June 23, 1994 in
NJ)
(19) Intergroup Pine Lake, Inc. (incorporated on February 9, 1996 in KY)
(20) Bellagio Capital Fund, LLC (established on June 18, 1997 in CA)
(21) Intergroup Casa Maria, Inc. (incorporated on April 3, 1997 in TX)
(22) Casa Maria Limited Partnership (established August 19, 1993 in KS)
(23) Healthy Planet Communications, Inc. (incorporated July 3, 1997 in CA)
(24) Intergroup Casa Maria, Inc. (incorporated April 3, 1997 in TX)
(25) Santa Fe Financial Corporation (incorporated July 25, 1967 in NV)
(26) Portsmouth Square, Inc. (incorporated July 6, 1967 in CA)
27. Financial Data Schedule
* All Exhibits marked by an asterisk are incorporated herein by reference to
the Trust's Form 10-K Annual Report filed with the Securities and Exchange
Commission on September 20, 1985.
** All Exhibits marked by two asterisks are incorporated herein by reference
to the Trust's Registration Statement on Form S-4 as filed with the Securities
and Exchange Commission on September 6, 1985, Amendment No. 1 to Form S-4 as
filed with the Securities and Exchange Commission on October 23, 1985, Exhibit
14 to Form 8 Amendment No. 1 to Form 8 filed with the Securities & Exchange
Commission November 1987 and Form 8 Amendment No. 1 Item 4 filed with the
Securities & Exchange Commission October 1988.
*** All Exhibits marked by three asterisks are incorporated herein by
reference to the Company's Form 10-K Annual Report filed with the Securities
and Exchange Commission on September 26, 1986.
**** All Exhibits marked by four asterisks are incorporated herein by
reference to the Company's Form 10-K Annual Report filed with the Securities
and Exchange Commission on September 28, 1988.
***** All Exhibits marked by five asterisks are incorporated herein by
reference to the Company's Form 10-KSB Annual Report filed with the Securities
and Exchange Commission on September 16, 1996.
****** All Exhibits marked by six asterisks are incorporated herein by
reference to the Company's Schedule 14A filed with the Securities and
Exchange Commission on December 21, 1998.
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE INTERGROUP CORPORATION
(Registrant)
Date: September 24, 1999
By: /s/ John V. Winfield
---------------------
John V. Winfield, Chairman of the Board;
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: September 24, 1999
By: /s/ John V. Winfield
--------------------
John V. Winfield, Chairman of the Board;
President and Chief Executive Officer
Date: September 24, 1999
By: /s/ William J. Nance
--------------------
William J. Nance, Director and Treasurer
Date: September 24, 1999
By: /s/ Josef A. Grunwald
----------------------
Josef A. Grunwald, Director
Date: September 24, 1999
By: /s/ Mildred Bond Roxborough
----------------------------
Mildred Bond Roxborough, Director
Date: September 24, 1999
By: /s/ Gary N. Jacobs, Esq.
------------------------
Gary N. Jacobs, Esq., Director and Secretary
Date: September 24, 1999
By: /s/ Dr. John C. Love
---------------------
Dr. John C. Love, Director
Date: September 24, 1999
By: /s/ Gregory C. McPherson
-------------------------
Gregory C. McPherson, Executive Vice President
Date: September 24, 1999
By: /s/ Michael G. Zybala
----------------------
Michael G. Zybala, Vice President Operations
Date: September 24, 1999
By: /s/ David Nguyen
-----------------
David Nguyen, Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME OF
THE INTERGROUP CORPORATION AND SUBSIDIARIES SET FORTH IN ITS FORM
10-KSB REPORT FOR YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-KSB REPORT.
</LEGEND>
<CIK>0000069422
<NAME> THE INTERGROUP CORPORATION
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 514000
<SECURITIES> 56758000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72443000
<PP&E> 43610000
<DEPRECIATION> 16076000
<TOTAL-ASSETS> 99977000
<CURRENT-LIABILITIES> 40622000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> 12529000
<TOTAL-LIABILITY-AND-EQUITY> 99977000
<SALES> 0
<TOTAL-REVENUES> 13236000
<CGS> 0
<TOTAL-COSTS> 10696000
<OTHER-EXPENSES> 2074000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2961000
<INCOME-PRETAX> (2495000)
<INCOME-TAX> 1005000
<INCOME-CONTINUING> (1439000)
<DISCONTINUED> 0
<EXTRAORDINARY> (298000)
<CHANGES> 0
<NET-INCOME> (1737000)
<EPS-BASIC> (.83)
<EPS-DILUTED> (.83)
</TABLE>
